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| − | A call option is the ''''right''''' but not the obligation to acquire an asset by paying a certain sum of money on or before a certain time. A call option gives the buyer of the option the right to buy the underlying asset at a fixed price (strike price or K) at any time prior to the expiration date of the option. The buyer pays a price for this right. | + | A call option is the ''''right''''' but '''''not the obligation''''' to acquire an [[Asset|Asset]] by paying a certain sum of money on or before a certain time. |
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| − | At expiration,
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| − | * If the value of the underlying asset (S) > Strike Price(K)
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| − | ** -> Buyer makes the difference: S - K
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| − | * If the value of the underlying asset (S) < Strike Price (K)
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| − | ** -> Buyer does not exercise
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| − | More generally,
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| − | * The value of a call increases as the value of the underlying asset increases
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| − | * The value of a call decreases as the value of the underlying asset decreases
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| − | A [[Pay-off Diagram|Pay-off Diagram]] for the '''buyer''' of call option looks like this:
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| − | <html>
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| − | <div id="jxgbox2" class="jxgbox" style="height:300px; width:400px;"></div>
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| − | </html>
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| − |
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| − | <html>
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| − | <script type="text/javascript"charset="UTF-8"src="https://cdn.jsdelivr.net/npm/jsxgraph@1.1.0/distrib/jsxgraphcore.js">
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| − | </script>
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| − | <link rel="stylesheet"type="text/css"href="https://cdn.jsdelivr.net/npm/jsxgraph@1.1.0/distrib/jsxgraph.cs"/>
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| − | </html>
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| − | <html>
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| − | <script>
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| − | var board = JXG.JSXGraph.initBoard('jxgbox2', {boundingbox: [-40, 150, 300, -150], keepaspectratio:true, axis:true});
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| − | var strikepriceslider = board.create('slider', [[0,0],[300,0], [0.0,100, 300]], {name:'strikeprice'}, {withLabel: false});
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| − | var callpriceslider = board.create('slider', [[0,0],[0,-300], [0.0,-100, -300]], {'strokeColor':'red'});
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| − | var strikepriceline= board.create('line', [[function(){return strikepriceslider.X()}, function(){return -150}],[function(){return strikepriceslider.X()},function (){return 200}]],{'strokeColor':'red'},{'dash':'true'});
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| − | var calloptionarrow1 = board.create('arrow', [[function(){return 0}, function(){return callpriceslider.Y()}],[function(){return strikepriceslider.X()},function (){return callpriceslider.Y()}]],{'strokeColor':'green'});
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| − | var calloptionarrow2 = board.create('arrow', [[function(){return strikepriceslider.X()}, function(){return callpriceslider.Y()}],[function(){return strikepriceslider.X()+200},function (){return callpriceslider.Y() + 200}]],{'strokeColor':'green'});
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| − |
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| − | </script>
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| − | </html>
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| − | A [[Pay-off Diagram|Pay-off Diagram]] for the '''seller''' of call option ('writing' a call) looks like this. In the interactive diagram below, the blue line represents the call option for the seller:
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| − | <html>
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| − | <div id="jxgbox" class="jxgbox" style="height:300px; width:400px;"></div>
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| − | </html>
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| − |
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| − | <html>
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| − | <script type="text/javascript"charset="UTF-8"src="https://cdn.jsdelivr.net/npm/jsxgraph@1.1.0/distrib/jsxgraphcore.js">
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| − | </script>
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| − | <link rel="stylesheet"type="text/css"href="https://cdn.jsdelivr.net/npm/jsxgraph@1.1.0/distrib/jsxgraph.cs"/>
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| − | </html>
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| − | <html>
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| − | <script>
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| − | var board = JXG.JSXGraph.initBoard('jxgbox', {boundingbox: [-40, 150, 300, -150], keepaspectratio:true, axis:true});
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| − | var strikepriceslider = board.create('slider', [[0,0],[300,0], [0.0,100, 300]], {name:'strikeprice'}, {withLabel: false});
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| − | var writecallpriceslider = board.create('slider', [[0,0],[0,300], [0.0,100, 300]], {name:'callprice write'}, {withLabel: false});
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| − | var strikepriceline= board.create('line', [[function(){return strikepriceslider.X()}, function(){return -150}],[function(){return strikepriceslider.X()},function (){return 200}]],{'strokeColor':'red', 'dash':'true'});
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| − |
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| − | var writecalloptionarrow1 = board.create('arrow', [[function(){return 0}, function(){return writecallpriceslider.Y()}],[function(){return strikepriceslider.X()},function (){return writecallpriceslider.Y()}]],{'strokeColor':'blue'});
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| − | var writecalloptionarrow2 = board.create('arrow', [[function(){return strikepriceslider.X()}, function(){return writecallpriceslider.Y()}],[function(){return strikepriceslider.X()+200},function (){return writecallpriceslider.Y()-200}]],{'strokeColor':'blue'});
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| − |
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| − | </script>
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| − | </html>
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| − | This diagram simply reflects that of the time of the purchase the buyer has a 'loss' (reflected by the purple arrow) and that the profit of a call option kicks in when the share price - the cost of the call option is bigger than zero.
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| − | There is a difference between European call options and American call options:
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| | * European calls are only exercisable at expiration. | | * European calls are only exercisable at expiration. |
| | * An American call may be exercised at any time prior to expiration. | | * An American call may be exercised at any time prior to expiration. |
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| − | As a consequence, an American call must be at least as valuable as on otherwise identical European call. The distinction between American and European options is very important for [[Real Options|Real Options]]. Real options typically ''can'' be exercised early and the value of the underlying asset is subject to erosion by competitors. | + | As a consequence, an American call must be at least as valuable as on otherwise identical European call. |
| − | | + | [[Category:mbi]] |
| − | See also: [[Put options|Put options]]
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| − | | |
| − | [[Category:finance]] | |
